Climate Financing, Need for Developing Countries

What is Climate Financing, Need for Developing Countries

Climate Financing refers to “local, national, or transnational financing drawn from public, private, and alternative sources. Check here Need for Climate Finance in Developing Countries.

Table of Contents

The 29th Conference of the Parties (COP29) to the UN Framework Convention on Climate Change (UNFCCC) will take place in Baku, Azerbaijan, from November 11 to 22, 2024. This conference is anticipated to focus heavily on climate finance, with significant discussions surrounding the New Collective Quantified Goal (NCQG) for climate finance post-2025.

Vulnerability of Developing States

Economically developing countries are among the most vulnerable to the impacts of climate change.
This vulnerability arises from:
- Geographical Factors: Many developing nations are located in regions that are particularly susceptible to climate-related disasters.
- Economic Dependencies: Their economies often rely on sectors like agriculture, which are highly sensitive to climate variations.
Despite their vulnerability, developing countries have contributed minimally to global emissions.
The Sixth Assessment Report by the Intergovernmental Panel on Climate Change (IPCC) indicates that developed nations account for 57% of cumulative global emissions since 1850, despite having smaller populations than many developing countries.

What is Climate Finance?

According to the UNFCCC, climate finance refers to “local, national, or transnational financing — drawn from public, private, and alternative sources — that seeks to support mitigation and adaptation actions addressing climate change.”
Climate finance can come from:
- Sources: Public or private, and can be domestic or international.
- Uses: Mitigation (reducing emissions) or adaptation (adapting to climate impacts).
A basic milestone for climate finance was the Copenhagen Agreement (2009 at COP15).
In the agreement, developed countries pledged 30 billion dollars between 2010 and 2012 for developing countries to carry out mitigation and adaptation activities, and 10 billion dollars per year until 2020.
This commitment was reiterated in the Paris Agreement in 2015, extending this aid until 2025.
The Organisation for Economic Co-operation and Development (OECD) tracks these financial flows, which include:
- International Public Finance: Comprising commercial and concessional loans, grants, and equity.
- Private finance is mobilised by public finance.
- In 2022, loans constituted 69.4%, while grants made up 28% of international public climate finance.
However, criticisms have emerged regarding the OECD’s reporting methods.
- Developing countries argue that these reports should reflect actual disbursals rather than mere commitments and emphasise that only new and additional funds should be counted.

Need for Climate Finance in Developing Countries

Developing countries require external financing for climate action due to:

Higher costs of capital, such as for solar photovoltaic and storage technologies, which can be twice as high in developing nations compared to developed ones.
In 2021, 675 million people in developing countries lacked access to electricity, according to the International Energy Agency (IEA).

Specific Financial Needs

India exemplifies the financial requirements for climate action:

By 2030, India aims to:
- Install 500 GW of non-fossil-fuel energy capacity.
- Produce 5 million metric tonnes of green hydrogen annually.
- Expand electric vehicle (EV) adoption.
Estimated financial needs by 2030:
- ₹16.8 lakh crore for achieving 450 GW of renewable energy capacity.
- ₹8 lakh crore for the Green Hydrogen Mission.
- Consumers will need to spend ₹16 lakh crore on EVs.
To achieve net-zero emissions by 2070, India will require ₹850 lakh crore in investments.

New Collective Quantified Goal (NCQG)

Setting a new NCQG is a primary objective at COP29.
Key considerations include:
- Actual disbursals rather than just commitments.
- Funds must be new and additional.
- Emphasis on public capital in the form of direct grants.
- Private capital mobilised by public funding should be included, but organically flowing private finance should not be counted.
An independent expert group has estimated that developing countries (excluding China) will require approximately $1 trillion in external finance by 2030.